A recent South Park episode aired in North America, ‘#REHASH’, and probably had most viewers over the age of seventeen, and who don’t devote at least 20 hours per week to playing Minecraft or League of Legends, a little mystified. In the episode, pre-school children taunted the show’s main characters, who are assumed to be about ten years old, because they didn’t understand the culture of video games as a spectator sport. The older children had only a vague understanding of who PewDiePie is, and no understanding whatsoever why their four year old siblings would rather watch video of people playing Minecraft than actually play the game themselves on the family Xbox. The living room is dead and a new entertainment industry has sprung up while you old people were sleeping.

Sure, new industries spring up all the time in recent years, but I was struck while giving a talk at a telecommunications conference in Silicon Valley the other day that 40-year-old executives had precisely the same lack of clues as cartoon ten-year-olds. PewDiePie? Who? DotA2? World championships ten million dollar prize purse? And suddenly I had everyone’s attention.

What kind of fast growing cultural phenomenon separates not only the middle-aged from the adolescent, but also slices finely through adolescent demographics with a resolution of months, not decades? One that grows so large, so quickly that unless you were in precisely the right place at the right time (playing League of Legends obsessively in 2012) you probably missed it.

esports, or the spectator sport of video games, has gone from almost nothing to a bona fide professional sports industry within two and a half years. In 2011 the Season 1 League of Legends World Championships was held at a small festival in Sweden, with 1.6 million global viewers, and a total prize pool of 100,000 USD. In 2014 the Season 4 League of Legends World Championships occurred live at the 45,000 seat Seoul World Cup Stadium in South Korea. 27 million viewers tuned in from around the world, and the prize pool was 2.13 million USD.

To put that into perspective, Major League Baseball’s World Series recently drew 14.9 million global viewers.
Here is a nice illustration of what that evolution looked like (stolen from Reddit):

The world championships for a similar video game, DotA2 (short for Defense of the Ancients 2) had a total prize pool in 2014 of 10 million USD. And the story is the same for Call of Duty Black Ops, with over 1 million USD in prize money, and a host of other popular titles.

The rapidity of esport’s growth has had some interesting side effects. esports has had to professionalize very quickly, and traditional media companies and sports agencies have begun to pay attention, but in the interim years there was tremendous opportunity for new players. Most people know about Twitch, and its acquisition by Amazon for just under 1 billion dollars. A few new entrants into this market have appeared, including SpeedInvest portfolio company hitbox.tv, who leads the pack of contenders for Twitch’s crown. But this won’t be a ‘winner take all’ market. Early investors have wondered if Twitch will suck all the oxygen out of the room, and create a service like YouTube, that dominates one sector of online video. But esports is growing in a number of directions, and esports video will resemble traditional sports far more closely than the vast monopolies enjoyed by internet companies that provide a best-in-class, narrow feature set, such as ‘search’ or ‘video self-publishing’ to a massive audience. There will be an esports ESPN (and, in fact, that might be a direction in which ESPN evolves, although the culture of traditional sports is not entirely compatible with esports); there will be a Tennis Channel of esports; Fox Sports; Eurosport; the Golf Channel, and on and on. This market can be sliced in many different ways for an online service, not just in terms of content programming, but also in terms of features and viewer requirements. Live viewers of professional esports might want high quality, stutter free video with professional production quality and professional announcers, but people watching celebrity gamers such as PewDiePie (the largest YouTube channel by subscribers), and others in the ‘Let’s Play’ movement who offer casual, and often comedic, video game play to millions of spectators, require features that engage an audience personally: chat, sweepstakes, voting and polling and loyalty programs. In the future, esports services in certain segments will provide unique features and interactivity.

esports is at the end of the very beginning of its commercial evolution. Justin Kan, founder of Twitch, was very clear in a recent interview at TechCrunch Disrupt: he believes that esports will be as large, if not larger, than professional sports. And I agree. The global video game market is already larger in dollar terms than cinema. Everyone plays video games. And live broadcast for video games isn’t just for elite cyber-athletes. PewDiePie and hundreds of others prove this. The esports market is at the very beginning of its growth, and it will have plenty of room for the professional gamers, in addition to the speed runners, ‘Let’s Players’, modders, hackers, the critically unskilled (and often unwittingly hilarious), and even the trolls and griefers.

On that note I’ll leave you with an old video of two young geniuses exploiting bugs and their opponents’ naivete in Team Fortress 2. ‘Team Roomba’ don’t have skills. They don’t have a coaching staff or a private bus or team jerseys. In fact, they are terrible and probably live with their parents. But they are hilarious, and 2 million people have watched them making their teammates lives an utter misery.

Yawn! Another blogpost on pitching. Is that going to make the world any better, solve riddles and problems of our time? Will it make me / you happier, slimmer, more beautiful, etc.? No. But the honest truth is: I can’t stand bad pitches any more.

You might think that we reached a point where everyone has consumed everything there is about good pitching, inhaled all the good material and all the pitches are perfect. Let me tell you the ugly truth from the front: they are far from that, especially in Central and Eastern Europe. It is probably the one skill where US startups crush any European Startup anytime. Unfortunately. Because there is a dozen of other disciplines, where we easily trump them. So let’s fix this.

I looked at my past year as an investor, and figured out I heard about 1 pitch a day, including weekends. Roughly 400 companies have tried to communicate their ideas in anything from 6 to 60 minutes and I can tell you, I went out of those pitches with a warm fuzzy feeling only 1 in 10 times. Why? Because still pitching is considered an “art” where it is really a craft, a skill, that can be trained and perfected, that can be learned and refined like nothing else in Startupland.

The preparation for this article was easy, attending Pioneers Investors Day and the Startup Awards weekend in a short time span. I tried to identify the most common issues and summarize them in clear statements, that make it easy to follow. So without further ado, 4 areas that your pitch needs to do perfect.

The Deck

Use a common structure, there are enoughgoodexamples. Why? This way you make sure everything expected is in there and I can follow it easily. Innovation should not be happening in the deck, but in your company.

There is only one, or maximum two, slides on the product in your deck. Why? It may be a super technical, super complicated product as such, but if you are not able to describe it in 2 slides, how on earth are you ever going to sell something?

Know your pitch. Inside out. If you stumble, I stumble. Why? After all you are talking about your company, your baby, your main occupation. You should know your stuff, right? Right?

The Speech

You are what I focus on. I need to get the strongest possible impression from you. Why? Because I also judge your startup based on the human capital. So show me the best you can.

That means: never turn to the wall and read your slides. Always keep eye contact. Hands out of the pocket. Give me the strongest, most assertive voice you have. No mumbling in your beard, no slow and silent speech. Why? Your energy translates to my energy. If you mumble your slides to the wall, hands in your pockets, no movement, I will feel uncomfortable or even bored. You don’t want that.

Love your pitch as much as you love your product. Why? Yes you might be in love with your product (that’s most likely the reason you started this company), but you need to love your pitch just as much to convince me. You will be pitching for sales, partners, employees, etc. in the future, pitching is your most important skill.

The Tools

Prototypes, product, etc. to the audience. Why? If you have something to show, give it to me. I am as curious about cool stuff as you. I WANT TO TOUCH IT!

No complex setups. Why? Whatever can go wrong in a pitch will go wrong. If you are not able to master your tools, you lose an opportunity to tell a story. Never be obsessed with those, be obsessed with getting the message across.

Stories are your best friend. Why? They immediately engage me, give me a context, and make for a perfect outline of your presentation. If you have a story to tell, use it. It’s your most powerful tool

The Q&A

This is the most important part. Why? A good Q&A can save a bad pitch. A bad Q&A can ruin it.

Short, precise answers. Why? I need to get the feeling you know your thing inside out. No need for long stories here. Time is precious. You wan’t to take as many questions as possible to show you know your thing.

Great question. Not. Why? Don’t congratulate me on a good question. Answer it. Q&A is No-Bullshit-Time. It’s like in a boxing ring, you would never tell the other guy “good punch”, would you?

Last not least: Know what you want. The Ask is what you do this pitch for. Pitching is about getting something. And even if you are just in training mode, ask for what you currently need. You never know who is in the audience and might be able to help.

Here’s an extreme version of what you can expect to hear just before signing over your startup in an acquisition deal: “Our counsel says including your first-born child in reps and warranties is totally standard. We have never had any pushback on this!”

Welcome to the fun part! You are about to be acquired by ACME SaaS ‘n Widgets! You have agreed upon, and signed a term sheet, after three weeks of painful wrangling that nearly cost a marriage and two lifelong friendships. Now, all you have to do is finalize the purchase agreement and send over a few due diligence files. You are almost over the finish line! This part is just a formality, right? Right?

The end is near, but you aren’t done yet

First, a few notes on organizing your team for the final push. The operational work of assembling and shipping the due diligence material and jumping through all the hoops and audits can be daunting. Make sure you budget time, and get your COO, your accountant and your back office A-Team well prepared. Chances are they will be in crisis mode off and on until the notarized signatures (in blood) are dry.

You also need a good lawyer, obviously. If you are big enough then maybe you have in-house counsel, but probably not. Spend some time shopping around as early as possible. Deep M&A experience and references are essential, but really pay attention to soft skills. Things can get tremendously pressurized and complicated and you want an experienced M&A attorney who also communicates clearly and efficiently. Keeping things simple and building a rapport with the buyer’s counsel are just as important as any LLM.

Also, you should agree on a cap on legal fees. Throw as much legal work into the deal as possible, and don’t hesitate to get a little pushy in negotiating an ‘all in’ price for full support for the entirety of the acquisition process. These are lawyers, after all.

Regarding due diligence, you will go through code audits, share all of your contracts and financials, and I guarantee that some weird stuff will come up that you didn’t anticipate. Startup financials are often messy and, honestly, when was the last time you put your source code through an auditing service to check for license and IP conflicts? You really need to keep a level head and make sure you have stable, inexhaustible crisis experts on the core team. Consider the stresses, late nights, and the fact that the deal will look like it is falling apart two or three times during the process. Delegate responsibilities accordingly.

Finally, you are going to find yourself confronted with a purchase agreement that is probably close to one hundred pages long. By the time you are through with the red lines, and the addition of schedules, you will be holding the draft of a major historical novel. Friends of mine have had this document bound and it sits today on the living room shelf as a constant reminder that they now have an enormous legal vocabulary and a pile of cash in the place where a soul used to be.

About that soul…

Now, about that soul: you are going to want to pay particular attention to a long section of your purchase agreement covering ‘Representations and Warranties’. This is where you will be living for the next three months. This section comprises all of the guarantees, risks and liabilities that you, your executives and founders (and perhaps your shareholders and extended family) will be assuming in the case anything goes wrong. The first draft of this part of your agreement issued by the buyer is going to be utterly terrifying, and here is the reason:

There has been a lot of early stage investment in the last few years. As one VC famously said in 2010 ‘An entire generation of entrepreneurs are building dipshit companies […]’ in the hope of selling to Google for 25 million dollars. Blame was squarely pointed at YCombinator and Super Angel investors like Ron Conway. I guess I fall into this bucket as well, but I sleep pretty soundly because the success of YC companies like Dropbox and AirBnB, or Uber (and my own investments Runtastic, the greatest sports training app of all time, or Shpock, one of the world’s leading consumer-to-consumer e-commerce apps; just sayin’) has shown this prognosis to be idiotic. But the flourishing of early stage investment and the rise of the ‘Super Angel’: prolific individual investors with fairly deep pockets, have started to change the legal dynamics of some acquisitions. Lots of people want to sell their companies. A few of them want to sell at an early stage. And many are backed by rich business angels, and thus buyers have the option of pushing founders and their investors to put their money where their mouths are. Buyers are increasingly likely to ask individual shareholders to take on large, personal liability.

You are going to want to push back hard on reps and warranties in any case, but you are somewhat likely these days to find the buyer putting you, your angels and VC in the firing line. Please, for my sake, and for the sake of my future, spoiled children, make this a ‘no go’ area. Uncapped, personal liability for individual shareholders is not OK, and we need to make it stop right now. It flies in the face of the principles of corporate law, and any attempt to include this sort of provision in a purchase agreement should be punishable by an eternity in the fiery pit.

You and your lawyer can really go wild redlining the first draft of the purchase agreement, paying very close attention to the reps and warranties. Work early with your founders and shareholders to establish hard limits here.

The following months are going to be a complete roller coaster, but try to keep in mind that there was tremendous goodwill and impetus on the part of the buyer to engage in this process and deploy copious and expensive resources to push the deal ahead. Everyone wants to see this through, and often seemingly insurmountable obstacles can be overcome if you all keep a cool head and get enough sleep. Deals that get to the purchase agreement stage probably maybe won’t fall apart.

If and when you do finally push your deal over the line, take a deep breath and get psyched about your upcoming stint as VP of Whatever at ACME SaaS ‘n Widgets. Try to learn from the new job, and enjoy it as much as you can, because, I guarantee you, the moment your earnout is achieved or your handcuffs are off, you are going to be out of there. Then take your cash pile and go help out some promising startups. And, when the time is right, like a father sitting down with his moody tween, have a talk with them about the birds and the bees and break out your old collection of VentureBeat articles about M&A.

If you missed Erik Bovee’s inspiring session on “How to do everything perfect: Raising money and getting acquired in Silicon Valley” at #Pioneers14 or just want to look up his tips & tricks you now have the chance to do so on Slideshare.

Startup Grind Vienna kicked off two weeks ago and invited Oliver for a truly personal interview about his entrepreneurial path. If you couldn’t make it to the party at Sektor5 you now have the chance to watch the video online.

You’re sitting in your office late on a Friday, alone. Hot wet tears are streaming down your cheeks. Your mobile phone rings constantly. Your CTO, shareholders, and everyone else is calling to learn how the meeting went. The COO who joined you on the conference call has already left and is taking Monday off.

And, of course, now there’s a dilemma.

After months of prep, tech and business development meetings, megabytes of pre-due diligence material, an ambitious joint business case, synergies, frank and open discussions about feelings and lifelong goals, dinner with the proposed acquirer’s leadership team, and a process that seemed to be going so smoothly, you have just hung up on the buyer’s VP of corporate development. They are excited about your joining the family, fantastic opportunity, etc. and they are happy to offer you precisely 40 percent of what you were sure your company was worth.

How do you explain this to your shareholders? Your co-founders? Who is to blame for this life altering disappointment? Why you? Why now?

Fear is a powerful negotiating tactic

There are a few important things to be learned from this scenario. First, Bovee’s law of mergers and acquisitions: if there is going to be bad news it always comes late on Friday afternoon, just as you are making plans for the weekend. You receive a call from the chairman of the board at 4:53 p.m., and you know, immediately, from the tone of her voice what she is going to say. It always happens on Friday.

Second, driving value in an acquisition has nothing to do with all that stuff you were working so hard on the last few months. Value in an acquisition is driven by fear. Period. What is going to motivate a CEO to spend top dollar for an acquisition? Feelings? Synergies? A really, really good imaginary business case? No. The threat of being heckled on stage at her keynote because she publicly lost a perceived major advantage to a competitor at the last moment. I’m not going to name names, but I just saw this happen a few weeks ago, and it sucked.

Let’s go quickly back through the list I gave you in “The Exit” part 2: you have an ambitious global expansion plan, a data room, protected your IP, cleaned up your cap table, and made sure key people are happy. You have been practicing the pitch and the story relentlessly, obsessively with your co-founders, and have set up your internal corp dev team and “wargamed” all the scenarios and negotiating points. You were ready for this. You were so ready, but now it looks like it will be impossible to close a 60 percent gap. The buyer is willing to issue a term sheet, and wants 30 days exclusivity, but the only alternative seems to be to back away from the table. And the disappointment is going to hit your team hard.

Everything that you did is important, but the key piece is to manage the acquisition so that you can create significant and true leverage. And the best leverage is to have other acquirers sitting eagerly at adjoining tables.

Timing is everything

Timing your discussions with competitive bidders is absolutely essential, and it is by far the hardest part. This is where investors and board members come into play. In certain cases, you might even want to consider retaining an M&A professional, because this piece requires full-time dedication. In the early stages, you, as a founder, shouldn’t be too aggressive, and if you are the CEO, and particularly if you are also heavily involved in sales for your company, you may want to hand off the early M&A outreach to someone else. You’ll get involved soon enough.

This part of the process is very much like enterprise sales, except the beginning is much easier. And the middle is much, much harder. You need to open a big pipeline of potential acquirers, and reach out to them all systematically. There are a few factors that are working against you here, and which make acquisitions rare (and which make timing an acquisition to maximize your leverage not only rare, but nearly impossible): there are probably only one or two dozen companies who are realistic acquirers for your company, but among this set there is a high probability that the subset having both budget and having earmarked companies in your sector as strategic targets for that year is zero. That funnel gets so narrow so quickly that you really need to put energy into the early stage.

Making the initial calls is easy. Many people, battle-hardened from years of enterprise software sales, will be familiar with negotiating access to decision makers. That doesn’t happen so much in M&A. Get your chairman of the board or one of your VCs to call their CEO. ‘This is about a potential acquisition…’ There, that stage is done. You have negotiated access to the power person.

I get a lot of questions from founders about trying to quantify the early M&A process: what is Google buying this year? How much did they spend on companies in our sector? What about Apple? And you can quantify these things to a certain extent, but they don’t help much beyond building the initial pipeline. M&A is particular for each company, and is tightly wound with company culture. It’s a real black box, in many cases. For instance, Google does spend lots of money acquiring early stage companies. And they do lots of deals, but they are also quite well known for acquiring talent. In general, the deals are not often big. And if you are talking to a large acquirer like a Cisco or Yahoo!, they have often developed their shopping list for that budget period long before your conversation started. You will have limited visibility or influence. I’m sure your technology/team/market is amazing. The VP of corp dev probably doesn’t care.

Sorry, no intermission for M&A

For similar reasons, the middle part of your M&A pipeline development gets hard. This is where you should be personally involved, or someone who pitches your company really, really well. In the best case, the acquiring CEO will delegate representatives from corp dev, the CTO team, business development/strategy and possibly product in early meetings to assess the opportunity. In the worst case scenario, you will find yourself talking to a corp dev associate who was an investment banker two years ago. In this latter case, it probably isn’t a deal. You found yourself outside the core acquisition bucket for that budget year, and they kicked it to an associate. It’s not a priority, or your first pitch was really poor.

When you find yourself on track with the right teams, schedule your time very carefully so that you can bring them up to speed in tandem. If you need to slow things down, don’t delay responses or deliverables: make sure you appear totally on the ball, and have your material prepped. Respond to data requests within 24 hours. But push meetings out if you need to. You are very busy. Your schedule doesn’t open up for 2.5 weeks.

If this process works out well, you might find yourself in acquisition discussions with 2 or more competitors, and this is the ideal situation. If you have a growth scenario (fundraising and maybe an IPO somewhere down the road) that is nice, too, but the threat of a competitive acquisition drives the strongest leverage. But you do also need to handle these discussions diplomatically. Don’t be too aggressive. Figure out ways to signal, discreetly, and as early as possible, that you are in discussions with other buyers. But don’t throw it in anyone’s face. They will back off quickly. If you can signal this well it should help you avoid the ‘disappointing initial offer’ scenario as much as possible. It can save you some tears and a ruined Friday night.

What to do about a disappointing offer

If you do receive a disappointing offer you can back off graciously. And often a clearly worded email restating the positive sides of the acquisition, the synergies (technical and cultural) the palpable excitement among your founding team, and the significant upside in the joint business case, can work late-stage miracles in pre-term sheet discussions, particularly (and often only) if coupled with some serious competitive leverage. If you have the guts to walk away the buyer will sense it, and you can quickly qualify or repair the deal.

But also be aware that there are limits. I’m sure you have done your homework as part of the development of your M&A pipeline, but look carefully at annual M&A spend and deal sizes of your potential acquirer. You have already agreed on an internal strike price. Reality check it, and if it looks like you could be headed for disappointment, get together with your team immediately and explore alternative scenarios.

At this stage, all the elements should be in place to start with a reasonable offer. There will be some verbal back-and-forth, standard negotiating, and you will probably spend a week or two arriving at what both parties consider a fair price and high-level terms. This is when the buyer will issue a term sheet.

Term sheet time

The term sheet is often surprisingly light after all of the process you have been through. It comprises an outline of the deal, is usually non-binding, and gets you ready for the final purchase agreement which is where the real fun begins.

Things to pay attention to in the term sheet: the buyer will almost always ask for a ‘no shop’ period, during which you can’t talk to other acquirers while the term sheet is negotiated. Obviously, push to keep this as short as possible. If you can get two weeks, that is awesome.

The term sheet should also include the purchase price, deal structure, escrow and ‘hold backs’, if any; there might be some HR stuff, termination, governing law and a few other points. You will spend the ‘no shop’ period negotiating all this. One important consideration: make sure that the terms are crystal clear, and do NOT under any circumstances, assume that you can change agreed terms simply because the document is non-binding. Attempting to do this gives a very bad signal to the buyer.

The buyer’s perception of risk will rise considerably in later stages of negotiation over the purchase agreement, and screwing up early communication and then attempting to backtrack during later, expensive legal wrangling can kill deals. Fast.

So, in a perfect world, you have managed a competitive acquisition process, it is Friday afternoon, and you just got off the phone with the acquiring VP of corp dev. The offer was only 17% off the strike price you had agreed with your internal corp dev team, and there is every certainty you can close the gap. And, in case you can’t, Acme SaaS and Widgets want to schedule a corp dev call next week. You give your COO a big hug and you both stroll off into the night to have a drink and plan your weekends.

You have a soft offer for your company, your shareholders are delighted and a few of you are already thinking about opening the champagne. Stop! Before you drive any acquisition conversations further, you need to get all shareholders together, and on the same page. Not only must you be in agreement, but you must all know the negotiating parameters, road map, business case and talking points absolutely by heart so there is no perceived disconnect when things get heavy. And things will get heavy.

This is the main error made by founders exiting for the first time. Sure, everyone knows the business plan. They know the cap table. You have more or less agreed on a price, but is your CTO a little nervous about delivering against the published roadmap? Will the time travel feature really be ready by October? How will it be ready, and which customers will pilot it? Your shareholders are delighted with an exit, but is your COO happy with an acqui-hire, while your VC has a hard requirement for a 10x return? Get this all on the table, and get it ironed out immediately. What does the story need to look like, internally, to assure you fall between 10x-12x? Does everyone know it by heart?

Here are some steps:

Organize an internal corp dev team (assuming you don’t have one already). These will be the people responsible for preparing materials, and for negotiating with the buyer. Build the story together. Above all, agree on a solid strike price: what is the threshold where everyone agrees you walk away from the table? And what are ‘no go’ terms – are you all OK with milestones? Are you all OK with a large escrow component? Will you consider an asset sale even when you really want a share sale?

When the story is built, rehearse with everyone and ‘war game’ it. Practice your positions. Practice your arguments.

Set up a very regular touch-point meeting with all stakeholders (weekly). Even in the early stages, when you aren’t in due diligence, you still want to get in the habit of keeping everyone in synch.

One thing to keep in mind when in the early stages of preparing a sale of your company: senior corp-dev people on the buy-side have probably done 5 of these deals this year alone. They are all experts in ninja mind control. Even though your company is awesome, they will be on the lookout for disconnects, and they will often add negotiating points into the early discussions that appear crazy, but are designed to test your team. If they sense something is wrong, in the very best case it will be used against you as negotiating leverage. The price will drop heavily if you aren’t careful. In the worst case, it will kill your deal.

Open the M&A Pipeline…carefully!

You have a soft offer to acquire the company. How do you make that a hard offer? And how do you assure you maximize your valuation? There are a lot of fuzzy variables that quickly come into play, and understanding and managing them is essential. If you are a first-time seller, you have a handicap immediately. You are unfamiliar with the process, and you also don’t have the brand name that would add value and a sense of urgency to the buyer. You may not have a big network in the Valley, and if your last name isn’t ‘Jobs’ or even ‘Houston’ or ‘Hoffman’, you will have limited cards to play. The key is understanding your cards and counting them carefully.

First comes the messaging — use your VC and board members to open conversations with potential buyers. But do it carefully. If you are too aggressive, potential buyers might opt-out early. They don’t want to be pushed around. Your ‘plan A’ should be growth, delighting you customers and acquiring new ones. And probably raising funds (and valuation) to achieve this. You aren’t ‘for sale’, but, yes, the conversation has been initiated, and the chairman of your board thinks it is fair that all potential partners participate.

Here are a few variables that you can control, and you should be aware of while in the early stage of the acquisition process (pre-term sheet):

US operational plan – if you are from outside the US, then you already have US customers (or a US pipeline), and you have elaborated a business plan to support this. Ideally, you have a US entity, and are hiring to support growing revenue and pipeline, but at least you should have a credible plan. Talk to a lawyer. Talk to an accountant. Build the plan if you don’t have it already. Execute early.

Early due diligence items – It’s a simple thing, but if a potential buyer approaches and wants to start the conversation, it is MUCH better to say ‘We have a data room. I’ll give you access credentials and you can see business plan, etc. immediately.’ Than to say, ‘ummm… We’ll need two weeks to prepare all that stuff.’ Being prepared early, and developing these materials is not only good for your business, but is also a non-aggressive sign that the process is moving ahead.

Intellectual Property Strategy – have you filed US patents yet? Do you have an IP strategy? Non-US founders will often take the approach of spending TONS of money filing an ‘everything but the kitchen sink’ PCT patent with a German lawyer, for example. Sure, that’s cool. But I would strongly suggest considering quick US patent filings. If you are already in an acquisition conversation, getting a filing date early, and protecting your assets directly in the US is a very, very good idea. If you aren’t protected in the US, and you have a US buyer, this may cause problems. Cross-border patent treaties are nice in theory, but I suggest you read up carefully here, and consider filing a quick US provisional patent to put a stake in the ground.

Human resources – pay very careful attention to key employees as early as possible. Do you have three engineers upon whom the fate of your company rests? Make sure they are happy. If required, make sure there is a plan to include them in the process, or at least protect them and yourself at the critical stage. Look carefully at everyone’s contribution to the code base. If you do this too late, the buyer might already have sniffed them out, and this becomes an acqui-hire. If key employees will be part of the process (and they might be at a later stage), coach them carefully.

Cap table – make sure it is super clean. I’m sure you already bought out your university roommate’s shares, but make double sure there is nothing weird here. Buyers hate complications, and even if you are awesome, any unresolved complexity might kill your deal at that late stage when the buyer’s attention to risk becomes really, really high.

Confidence – this is fuzzy, but probably one of the most important things. And it relates to your whole team. Make sure that everyone on the team understands the plan, and can tell ‘the story’ perfectly, with excitement and energy. As a founder, you need to lead by example. Watch some YouTube videos of Steve Jobs’ keynotes. Do some Zen meditation. Practice the story over and over again in your head: the growth, the IP, the roadmap, the laser-focused execution. Honestly, non-US founders often suck at this, so you need to practice. A lot.

This is a lot to digest, so I am going to leave it here for now. If you have covered the above points well, you are in an excellent position to start working with a term sheet. In the next two posts, I’ll go into further detail about what you need to do when you have a solid offer, and particularly managing the risks that appear during term sheet negotiation, due diligence, and finally closing.

This is part two of a four-part series on start up exits by SpeedInvest partner Erik Bovee.

Silicon Valley talent comes from all over the world. Approximately 30 percent of software, semiconductor and computing companies in the US are founded by foreigners, and over 50 percent of tech startups in Silicon Valley are founded by immigrants. Consider this along with the fact that an absurdly high number of acquisitions in the tech industry (and acquisitions in general) happen right here in California.

If you have a successful startup, you are more likely to come from Budapest than Burlingame, but you are also most likely to find an exit in the Valley. Hopefully this guest post should serve as a guidebook for everyone, but should be especially useful to founders who suddenly find themselves landing at SFO with a nine hour time delay and have to take a taxi straight to a board room filled with EVPs and lawyers.

If you are a founder (from anywhere in the world), you think you have built something exceptional, and if you dream of moving to Cupertino or Mountain View, never seeing winter again and wearing a nice, shiny ‘Vice President’ badge at Apple or Google, please read carefully.

I’m going to assume that you’ve done all the pre-exit stuff perfectly (viz. building a business). A few things stand out that any company needs to do before even considering talking to potential buyers. I’ll just summarize these, because this post is really for those who already understand the basics.

Differentiation – you have something everyone needs. In many cases (especially for non-US startups) this will be world-class IP: you have built a time machine; you have invented near light-speed space travel at almost zero cost. In our most recent case it was solving a problem with real-time Web collaboration that even Google had struggled for years to get right. Maybe you have captured a really, really important customer segment, maybe your growth is off the charts and Yahoo! needs your customers. If the latter has happened, you are probably already incorporated in Delaware, and the CEO has been in Palo Alto for 3 years. More likely, if you are a technician from outside the USA, you have some very interesting intellectual property (that you have protected well; this will be the subject of a later post), and you have turned that into an even more interesting product, and a successful business.

Business Development – you have hired someone senior in the Valley full-time. You have been doing BD for 12 months, and you have US customers. At least a pilot. You have a few big partners lined up. Your BD person is doing an excellent job. She is senior. She coordinates well across time zones, and spends 10-weeks a year at company HQ. There is trust. Results. The whole thing runs like clockwork, because you invested in skilled business development early. And you cannot invest in good BD early enough: take a quick look at the a16z.com “Team” page and you’ll get the idea. Andreessen Horowitz makes sure their companies are well furnished with BD and growth resources from day one. For foreign companies, also please note: US customer revenue will generally count approximately 2x in your exit valuation vs. non-US. Unless you own China. Then ignore that.

The story – you have created a compelling story out of your growth, your differentiation, and you know how to tell it. You have a whole suite of investor and marketing material that looks completely professional (and completely ‘American’). Hire a designer. Get local advice. Practice it, and polish it 500 times. NO matter how simple the story you are telling, keep working on it. Make it amazing. And when it is good, start pushing it out to the press. Make a plan that shows you are hitting milestones systematically. Your company blog should also reflect this. There should be VERY regular updates, significant milestones. You are growing fast, and everyone knows it. Your company radiates success. A quiet company = a company that is facing internal struggles. An outdated blog smells like death.

Sales – you have customers, and you have built a believable pipeline. Sales, BD and CEO spend a LOT of time in New York or California. Prioritize your sales efforts accordingly!

Product – Non-Silicon Valley entrepreneurs often don’t realize how quickly they need to move. Research your market in the US, Asia. Figure out your roadmap and hit milestones with punishing accuracy. If something doesn’t work in your CTO /product team, deal with it immediately. Immediately. Break it, and repair it as fast as you can. Product announcements that go nowhere, delayed releases, features that are behind the curve. Death.

I’m assuming that everything else is perfect. You have fought like crazy, and your business is growing. Your product works. Customers need it. The market is hot. You have revenue, and perhaps a lot of it. You are in VentureBeat, TechCrunch, and have a passing mention in Forbes.

Now comes the tricky part. I was talking with a good friend who has a successful US tech business. Revenue is doubling every year. They have nearly one hundred employees after just 3 years. Sexy technology. Purely bootstrapped. Very hot market. Things are happening. But they haven’t been acquired.

I’m amazed anyone ever gets acquired. It’s the hardest thing. The process is so weird, and everything can go wrong at any moment. And it usually does. Selling a company is very different from selling a product. The perception of risk on the part of the buyer is different, and there are often far more people involved than at any other significant event in the life of your company. An acquisition is a very, very fragile thing. And it often takes much longer than you planned. You need to go about it with scientific precision, and complete dedication.

You want to be bought, not sold

This is obvious. You don’t want to set the premise that you are looking to be acquired. It signals immediately that something is wrong: the business is unsustainable, the founders lack confidence, the market is about to head south.

But you do want to open the acquisition conversation with potential buyers, and there are many ways of doing this without immediately putting yourself up for sale. One of the best ways is to set an early expectation about your fundraising agenda. Your growth is great. The market shows no sign of cooling off, so you are raising an $XX million series-B round in Q4 of this year. You need this plan. Start building it now because it will be the backstop to many future acquisition conversations.

If you are lucky enough that a potential buyer opens the conversation, and asks up front “Is your company for sale?” (or, even better, ‘We want to acquire your company!’) the answer is always the same if it is the first conversation you have around this subject: We weren’t considering selling. Growth is great; we are raising money in Q4. But, if the price were right, we might consider it. And leave it at that for the moment.

Now the entire conversation with all of your other partners changes. Your company may or may not be up for sale. Someone has made an overture, but your “plan A” remains customer acquisition, fundraising and growth. You have a limited window, and you want to make sure that all viable acquirers participate, but you don’t want to be desperate or pushy. You also don’t want to ruin your pipeline, or scare anyone off. Shareholders and board members can help drive these conversations while not jeopardizing customer relationships. This is the time when you need to organize internally, systematically, and it becomes a process.

If no one has proposed acquiring, then you need to ask yourself ‘Why?’ Revisit points 1-5, above, and do them better.

So you have built a solid business with a clear exit path, you have a soft offer, you engaged your investors and your board, and you have your early M&A messaging under control. And you have also built a clear plan B (this should always involve raising funds and/or accelerated growth), tested it, and your buyer is aware. Now things start to get tricky…

This is part one of a four-part series on start up exits by SpeedInvest partner Erik Bovee.